Switzerland has long made it a priority to maintain a low-tax environment, while its individual cantons have been innovative in their approach to achieving this aim. FDE speaks to two members of KPMG’s international corporate tax team, Thomas Linder and Hartwig Hoffmann, about some of the latest initiatives.
There are many ways that companies can improve profitability but one of the most potent - and most popular - is to reduce the burden of tax. Relocating a corporate headquarters in a low-tax jurisdiction is not as onerous as it may sound, especially if the jurisdiction in question is Switzerland, which offers Europe's most competitive business environment (according to the 2013 Index of Economic Freedom).
One only has to look at some of the companies that have relocated to different Swiss cantons in recent years to see that the country's efforts to attract big business are effective. In 2010, for example, chemicals group INEOS moved its headquarters from the UK to Switzerland with the express intent of saving £100 million a year in tax. Examples of world-leading companies benefitting from one of the best business locations in the world include carmaker Nissan, internet ompany Yahoo! and US multinational Chiquita Brands, which moved to the Lake Geneva region.
In 2011, Switzerland's business-friendly tax policies prompted online discount offers company Groupon to open up its international headquarters there. The following year, Coca-Cola Hellenic - Greece's largest company - relocated its top holding to Zug.
"The main advantage of doing business in Switzerland is the whole structure of the business environment," says Thomas Linder, a director in the international corporate tax team at KPMG and a member of the company's global location and expansion services group. "It has competitive tax rates, flexible labour law, a highly qualified workforce and good infrastructure, and there are many industry clusters there already. Switzerland regularly ranks in the top ten in international business comparisons measuring the ease of doing business.
"Over the last ten years, there has been a steady inflow of big companies setting up headquarters here to access the European market," he adds. "The US has been the most important investor here for many years and we are just starting to see more investment from companies in China and India."
A licence to do business
Competitive tax rates exist across Switzerland, although individual cantons have a substantial degree of autonomy and can therefore regulate their own tax regimes to attract investment from domestic and foreign companies.
"In general, the tax models are the same in the different cantons, though there are some regional differences in the tax regimes. Some have relatively high rates of tax, between 20-24%, but Lucerne and Nidwalden, for instance, have effective tax rates as low as about 12%, and that is before taking into account any of the additional incentives," says Linder.
One of the key incentives available in Nidwalden comes in the form of the licence box system, which is specifically designed to benefit companies that rely on intellectual property (IP) as a source of revenue. The system effectively reduces the tax rate on net licence income and goes a step beyond similar systems introduced elsewhere in Europe.
"The system benefits those companies that centralise IP and charge royalties," says Hartwig Hoffmann, director of international corporate tax at KPMG and a member of the company's international tax-efficient supply chain group. "It has only been running for two years, but many companies are already taking advantage of it. Taking into account the licence box system, the effective tax rate in Nidwalden can be as low as 9%."
A similar concept underlies IP box systems that operate in countries such as the Netherlands and Belgium, but Nidwalden's licence box system - while being fully EU-compatible - takes a much wider view of what can be considered as qualifying IP, classifying R&D expenses as fully deductible against income.
"The definition of qualifying IP is much broader," Hoffmann explains. "In the Netherlands and Belgium, the focus is very much on patents, whereas in Nidwalden the definition covers patents, trade marks, copyright and everything else. Also, it does not have to be IP that a company has developed itself, as the definition covers IP that has been bought in as well. Nidwalden is a small region, so it is important to keep the definition as broad as possible."
The appeal of the licence box system is such that it is not only proving attractive to foreign companies that rely heavily on income from IP, but also to companies within Switzerland, among which there has been a notable migration to Nidwalden.
"The possibility of increasing tax efficiency is attractive to both foreign companies and Swiss companies, so we are seeing companies that do business in Basle or Zürich coming to Nidwalden to centralise their IP," notes Hoffmann.
At present, there are preliminary discussions at a federal level about whether to increase tax harmonisation across the cantons. This could see tax rates level out across the different cantons, and lead to licence box schemes being implemented elsewhere in Switzerland, but for now, Nidwalden stands out in putting such a scheme in place.
"The good thing about the Nidwalden licence box regime is that it is sustainable," says Linder. "Some regimes that are designed to attract companies may be abolished in a few years, but the licence box regime looks like it will last, so companies can rely on that environment in Nidwalden for a long time to come.
"Can other countries, where the government changes every few years, guarantee that there will not be changes in the law governing similar schemes?" he asks. "Switzerland rarely changes its tax laws."
Fertile ground for tax efficiency
Switzerland's commitment to competitive tax rates and efforts in cantons to attract specific types of business are proving highly effective in achieving their goals of attracting big business. Yet the country has gone even further.
"All cantons can give tax holidays for up to ten years, usually if a company creates a significant number of jobs. The more jobs, the longer the holiday," says Hoffmann. "At the federal level, if investment is made in an economically underdeveloped area, usually somewhere rural or remote, then the government can grant tax holidays, so it is possible to pay zero tax over ten years if a company makes a big investment.
"In addition, in the canton of Grisons, for example, the authorities also give grants to help with the investment in buildings and other infrastructure to share the cost of creating jobs," he adds.
Companies have many reasons to look at Switzerland as a fertile home for business, but the choice of which canton to invest in will depend on many different factors. Tax optimisation is a key consideration, but companies will also need to weigh up factors such as being close to major airports, and whether the location is near an economic centre with qualified workers.
Once that decision has been made, there are other issues that apply to the country as a whole that make long-term investment there relatively risk-free compared with other jurisdictions in Europe. Switzerland is, for instance, very stable politically. The same parties have been involved in running the country for at least the last 50 years.
Another key issue is the country's flexible labour laws, which not only make it easy to employ people when a business is growing, but also easy to lay people off - compared with countries like France, the Netherlands or Belgium - if a business has to downsize.
"There are generally fewer risks with setting up a business in Switzerland and there is no fear that the tax rate will rise," says Linder.
Given the current environment in much of Europe, the appeal of Switzerland as a home for business may grow substantially in the years ahead.